Blackstone bullish on India story, to invest over $2 billion over the next 5-6 years

The investments will be from its recently raised $23 billion fund, two top officials of the Blackstone Group said in an exclusive interview with ETSneha Shah&Shailesh Menon | ET Bureau | November 06, 2015, 08:09 IST

MUMBAI: Private equity company Blackstone could invest over $2 billion in India over the next 5-6 years, a further affirmation of the optimism of most foreign investors about the prospects of Asia’s third-largest economy. The investments will be from its recently raised $23 billion fund, two top officials of the Blackstone Group said in an exclusive interview with ET. “Our developing markets strategy encompasses India, China and to some extent Australia. India is our largest destination for capital (among emerging markets) and will continue to be so but it may even outweigh relative to what we have invested in the last 5-6 years,” Joseph Baratta, global head of PE at Blackstone Group, said.

“We invest roughly between 10-15% of our funds outside of the US and Western Europe. So, roughly more than $2 billion (of the $23 billion) is likely to be invested in this country. If we find interesting opportunities here, then around $2.5-3 billion could be invested over the next five to six years in India,” Baratta added. “You don’t have governance issues. You see in Russia what is going on geopolitically, in Brazil there is all kinds of talk about what is happening with the government and the impeachment and besides, the economy there is shrinking (-3% in the previous quarter). You don’t have these issues here,” said Prakash Melwani, the global chief investment officer for the New York-based fund manager.

Both said more investments would flow if regulators made it easier to list and delist from exchanges and if the uncertainty around the Mauritius doubletaxation treaty was cleared up.

“One major barrier to transacting has been some of the Sebi requirements; it is very hard to buy control of public companies; it’s also complex to access the equity capital markets and it continues to be despite the fact that we’ve had a recent highly successful IPO in SH Kelkar. It took forever; the lead time is long, the filing requirements are complex and the marketing period is long,” Baratta said.

“There’s confusion about double-taxation treaty with Mauritius for capital gains tax. There’re different court interpretations. This is taking up a lot of legal time. It causes a lot of problems for the parties involved in sale or purchase of business. Getting some clarity on that would be an important thing,” Melwani said. The firm that has invested around $5 billion in India so far through private equity and real estate investments is also contemplating bringing its credit and special situations businesses to India provided policies relating to bankruptcy are simplified. The government on Wednesday unveiled plans to reform India’s complicated bankruptcy procedures. A new bankruptcy law is in the works and is likely to be introduced in the winter session of Parliament.

However, Baratta cautions that a lot of laws will have to be changed for global investors to get comfortable with investing in debt in India. “We talk about bringing our credit business and also our special situations group -- that sort of falls between our PE and real estate... they are all interested in investing in this country. There’s need to meet a fewer pre-conditions needed to make that viable and of scale... we’re dipping our toe in the water in these other businesses... but to come here in scale, we'll need some of these structural reforms,” Baratta said. “The debt market here would need some kind of orderly bankruptcy reforms which deal with companies that cannot meet their obligation.” With the Modi government implementing reforms to provide an impetus to the economy, India has become one of the bright spots for the fund house that manages more than $334 billion globally.

Blackstone Group recently raised the $23 billion Blackstone Capital Partners VII fund, it’s largest so far, for investing in private equity transactions across markets. Since its entry in India in 2005, it has invested $2.3 billion via 20 transactions in PE deals and roughly $2.5 billion in Indian real estate across 16 deals.

India Journey

In 2013, the firm saw a churn at its India top deck with Amit Dixit and Cyriac Mathew, both senior managing directors taking charge of the India office. The fund has since then exited four of its investments and returned a total of around $950 million. “Based on the history and our journey here, our faith is in the leadership here that is in Amit and Mathew. India is much more closely integrated into the firm than it was 5-6 years ago. And we are quite comfortable with what we have learnt in the country, the leadership and the predictability is far better now than it was 10 years ago,” Baratta said.

Blackstone had gone through a rough patch after they invested in some of listed companies whose fortunes fell subsequently. Having cut some of their losses and moved on, the portfolio of the fund is now recovering and is back in black.

“There are some things we have decided we are not going to do such as small and purely passive stakes in public companies, (or) investing alongside managers and promoters who we do not believe are of the highest quality even if the price is cheap or there is some other attractive element to it. That is a sacrosanct quality for the people we invest with,” Baratta said.

The fund will also consider investing in India the long-term capital it is planning to raise from investors that does not have a defined investment and exit period. This, the firm believes, will give it the tool to invest in companies emulating the strategy of Warren Buffet. “It’s a priority strategically for the firm and I think we are making progress as a firm on it and we can’t say more on this. But I would say it is very high on our list of things to be focused on,” Melwani said.

Global PE investors have invested more than $50 billion in India this year through PE, debt, real estate and special situations finds. The Blackstone officials praised the Modi government’s efforts to control the fiscal deficit and hence inflation, which in turn would help keep the currency stable. Currency is a big factor because at the end of the day we are dollar investors. We try to get a better handle on inflation to understand currency cycles. Fiscal discipline is the key here. India has been the best performing EM currency in last few months,” said Melwani.

“Responsible investors look at this trend very closely. I’d say it’s a better moment to be investing in India at 60-odd rupee to a dollar than coming at 40-odd to a dollar,” Baratta added.